Shares of social media company Snap (SNAP 0.31%) were pummeled in after-hours trading on Thursday, losing about a quarter of their value. The drop followed the photo- and video-sharing platform's worse-than-expected second-quarter results.
The sharp decline was likely disappointing for battered and bruised shareholders. Shares were down more than 60% going into the report, likely leaving investors desperate for a win.
While there are times when buying into the dip may make sense, it may not be the right move this time around. The company arguably didn't give investors good-enough reasons in its second-quarter update to get greedy when others are fearful. Let's take a look at the results.
The numbers investors should know
Snap's revenue grew 13% year over year in the second quarter of 2022. Investors, of course, should note that it was against a tough comparison of 91% growth in the year-ago period. However, that doesn't diminish the fact that the growth marked a significant sequential deceleration. Year over year, top-line growth was 38% in the first quarter of 2022.
Snap had initially guided for second-quarter revenue to increase about 18% year over year in Q2, but then the social media company said in late May that growth would miss this target. At the time of the guidance cut, management cited a difficult macro environment for the worse-than-expected slowdown.
Earnings per share for the quarter were also poor, coming in at a loss of $0.02 on an adjusted basis.
What management had to say
Snap CEO Evan Spiegel was disappointed with the results, noting that they "do not reflect our ambition." But Spiegel pointed out that the company saw healthy growth in its user base. Daily active users rose 18% year over year to 347 million. Analysts, on average, were expecting this key user metric to come in at about 344 million.
Looking to Q3, management didn't provide any financial guidance, citing "uncertainties related to the operating environment." This is in contrast to the company's willingness to provide guidance at the time of its first-quarter report. (Of course we saw how that worked out.)
Why the stock may not be a buy
While a significant pullback in Snap's revenue growth rate isn't necessarily a red flag for the company's business, it may still be a concern for investors in light of the stock's pricey valuation. For instance, Snap's market capitalization of about $27 billion going into the earnings report is quite a sum, considering Snap has yet to become sustainably free cash flow positive. During the second quarter of 2022, its free cash flow was negative $147 million. For the six months ended June 30, it was negative $41 million.
Finally, the company's announcement on Thursday, along with its earnings report, that it has authorized a $500 million share-repurchase program isn't necessarily good news. Snap isn't yet consistently profitable, making significant cash reserves prudent. Further, a $500 million repurchase program isn't a substantial portion of its market capitalization -- even after accounting for the stock's decline in after-hours trading.
Sure, it's material -- but it's not an elephant gun that can change the thesis for investors. So why significantly reduce cash to only reduce share count slightly at a time the company's valuation is still questionable, relative to its underlying business performance?
With these points in mind, investors may want to consider steering clear of Snap until the company can prove its business performance is worthy of its stock's valuation. In addition, investors should hope for evidence of better capital-allocation skills from management in the future.
